Chart of accounts refers to list of accounts used by businesses and organizations to identify the various class of items for which money is spent or received,its mainly used to organize finances of a given business entity and to segregate revenues and expenditures,assets and liabilities in order to give stakeholders and interested parties a better understanding of financial health as well as assisting investors in decision making.In chart accounts each nominal ledger account is unique to facilitate ease of identification,it consists of profit and loss statement which basically indicates the performance of a business entity in regards to a given duration of time normally one year, such that if profits are high then it means the performance for that period was good in addition to balance sheet which is made up of short term and longterm assets and liabilities where assets indicates what an entity owns and liabilities refers to obligation to pay debts,it is also made up of capital invested by shareholders, in general balance sheet shows the financial position of an entity.Most countries do not have national standards in regards to charts of accounts hence relying on the general guidelines which are in place(Piland,1999).
Chart of accounts is very important since it serves as the foundation for a company or an organization financial records system it also aids in segregation of expenditures,revenues,assets and liabilities so that users can be able to know the performance as well as financial health of a given business.A well developed chart of accounts ensures that an entity complies with financial reporting standards as well as fulfill the needs of other interested parties such as investors and customers(Piland,1999).chart of accounts enables a business to monitor its liquidity this is very important to a given business set up as it enables it to meet its daily operating cost such as payments to suppliers and daily running costs,liquidity in this case is measured using the daily cash inflows and cash outflows in addition through analysis of chart of accounts an investor will be able to make relevant decisions such as investment decisions, basing on performance of an entity based on chart of accounts figures.Shareholders of a given business do use chart of accounts to monitor how their investments is perfoming this is very important since they use such information to make decisions such as firing of management personell and also as a basis of giving out bonuses.In summary chart of a accounts is the hub of an accounting system and it determines how your financial reports will look like.
Reference
Piland, N. F., Glass, K. P., & Center for Research in Ambulatory Health Care Administration (U.S.). (1999). Chart of accounts for health care organizations. Englewood, CO: Center for Research in Ambulatory Health Care Administration.
